Small Business

The best financing opportunities for minority entrepreneurs

By: Irene Malatesta

Minority entrepreneurship is on the rise.

While 15 percent of small businesses were owned by minorities in 2015, a recent study found that minority entrepreneurs accounted for 45 percent of small businesses in 2018. What’s more, African American small business ownership alone grew 400 percent between 2017 and 2018.

Suffice it to say it’s an exciting time to be a minority entrepreneur. Altogether, there are more than 11.1 million small businesses owned by minorities today in the United States.

Despite these encouraging statistics, however, many minority small business owners have a difficult time securing the capital they need to grow their companies. In fact, when asked, 36.3 percent of minority business owners said their biggest challenge was a lack of funding.

If you’re a minority business owner who needs money to fund your operations, you can apply for one of these more traditional forms of small business financing:

Business lines of creditgive entrepreneurs access to funds on an as-needed basis (as long as they continually pay it back). If you were to secure a $100,000 credit line, for example, you could withdraw up to that amount—only paying interest on what you spend. However, business lines of credit can be hard to get, and they often require a personal guarantee. This means that if you’re unable to repay what you borrowed, you may be personally liable for the debt.

Loans from major banksused to be the go-to form of financing for small business owners. Following the 2008 financial collapse, however, many banks moved away from funding small businesses. Today, traditional lenders such as major banks only fund about 25 percent of the small businesses that come their way. If approved, you may be able to get a large loan with a low interest rate. But the approval process can be incredibly time-consuming, and banks tend to only lend to companies that have exemplary credit scores and solid financials.

Merchant cash advancescan help companies that process a lot of credit card transactions get the funds they need. In exchange for a cash advance, you agree to forego a certain percentage of your future credit card receipts until you repay the principal, plus fees and interest. While relatively quick and easy to secure, this form of financing is often prohibitively expensive. Believe it or not, APRs can climb as high as 200 percent.

As you can see, while these forms of small business financing can certainly help you solve your cash problems, they each have their fair share of downsides.

The good news is there are several other options at your disposal. As the U.S. becomes more diverse and inclusive, an increasing number of lenders are prioritizing loans for minority entrepreneurs.

Loans from minority-focused lenders

In recent years, a number of lenders that exclusively fund disadvantaged business owners have emerged. Some of these financiers include:

The Business Center for New Americans(BCNA)funds small businesses owned by immigrant and refugee entrepreneurs based in New York City. They offer microloans that need to be repaid within six months to three years, range from $500 to $50,000, and come with interest rates falling between 8.25 percent and 10 percent, depending on how big the loan is. The BCNA tends to favor businesses that haven’t been able to secure financing through traditional lenders due to bad credit or a lack of business history. To date, the organization has provided more than 3,250 loans totaling over $21.6 million.

The Minority and Women Revolving Loan Trust Fund Programwas created by the state of New York in 1995 to help minority and women entrepreneurs get the funds they need to grow their businesses. The program provides working capital loans up to $35,000 and fixed asset loans up to $50,000. Find more information here.

Union Bank’s Business Diversity Lending Programis designed to help minority business owners secure up to $2.5 million for their companies. To qualify, a minority needs to own at least 51 percent of the business seeking funding. The company also needs to have been open for at least two years and must have annual sales below $20 million. Find out how to qualify here.

The Business Consortium Fund Loan(BCF) helps minority entrepreneurs who haven’t had luck securing financing through traditional channels. Loans of up to $1.125 million are available, with interest rates not exceeding 3 percent above the prime rate and terms of seven years or less.

Resources and grants for minority-owned businesses

Not interested in taking on debt? There are also a number of grants and other resources available to minority small business owners:

The Minority Business Development Agencyoperates under the U.S. Department of Commerce. While the agency doesn’t provide its own grants, it does help minority entrepreneurs secure grants through other programs.

The Operation HOPE Small Business Development Programprovides minority entrepreneurs and those in underserved communities with the knowledge, resources, and support they need to overcome funding challenges and grow their businesses.

The First Nations Development Institute Grantis available to Native American, Alaskan, and Hawaiian entrepreneurs. To date, more than $31.7 million has been given to nearly 1,500 small businesses.

The National Minority Business Councilprovides minority entrepreneurs with the resources they need to grow their businesses. This includes specific programs for women, executives, veterans, and entrepreneurs. Some of these programs offer education, training, technical assistance, workshops, and access to business leads and funding opportunities.

Loans from the Small Business Administration

If you don’t need funds right away and you’re feeling up for the challenge of trying to secure money through the government, the Small Business Administration (SBA) also offers a number of different funding options to small business owners, some of which are explicitly available to minority entrepreneurs and businesses that operate in underserved communities:

SBA 7(a) loans, ranging from $30,000 to $5 million, are available to entrepreneurs who have at least $120,000 in annual revenue and credit scores of at least 680. Recent data revealed that 26 percent of these loans go to minority business owners.

SBA 8(a) Business Development loansare available to entrepreneurs who are socially or economically disadvantaged. The program aims to award at least 5 percent of available dollars to minority-owned businesses.

SBA microloans of up to $50,000 are also available to minority entrepreneurs. Interest rates fall between 8 and 13 percent and loans must be repaid within six years.

SBA Community Advantage loansare available to entrepreneurs in underserved communities who need up to $250,000 in financing.

Find more information or learn how to apply to any of these grants or loans here.

Another option: alternative lenders

Financing from alternative lenders has continued growing in popularity since the Great Recession. While many of the options we’ve discussed above have their advantages, many business owners simply don’t have the time to complete multiple lengthy application forms, or wait for days or weeks to find out if they’ve been approved.

If time is an issue, you may not be able to depend on winning a grant or getting assistance from one of the organizations above. That’s why many entrepreneurs are turning to alternatives, including fintechfinancing firms. With many options available online, you may be able to get a credit decision for your business quicker than you thought, without depending on less predictable funding sources like grants.

Being an entrepreneur is hard work. Being a minority entrepreneur can be even harder — particularly when money is tight. By learning about the small business financing options that are available to you, and applying for the loans and grants that are the best match, you can secure the funds you need to grow your business. Good luck!

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Irene Malatesta

Irene is a business content strategist with Fundbox, where she works with entrepreneurs and mission-driven businesses to bring their stories to life. Fundbox is dedicated to helping small businesses grow by democratizing access to credit.